Business | General
Use oil price cushion to ring in reforms
The petroleum sector plays a prominent role in all GCC economies by virtue of accounting for more than three-quarters of the treasury income and exports
- Dr Jasim Ali, Special to Gulf News
- Published: 00:00 May 1, 2011
- Image Credit: Reuters
- A worker adjusts the oil flow at Al Shouayba refinery in Basra. The petroleum sector plays a prominent role in all GCC economies by virtue of accounting for more than three-quarters of the treasury income and exports.
It is not possible to disagree with the IMF's recent upward revision of economic growth rates for the six-nation Gulf Cooperation Council (GCC) from 5.2 per cent to 7.8 per cent in 2011. Not surprisingly, developments within the petroleum sector, notably rising oil prices and production levels, are cited as primary reasons for the decision.
To be sure, the petroleum sector plays a prominent role in all GCC economies by virtue of accounting for more than three-quarters of the treasury income and exports and about one-third of gross domestic product (GDP).
Needless to say, steady oil revenues on the back of a combination of stronger prices and production allow for higher public sector spending, in turn paving the way for superior GDP growth rates. For instance, Qatar increased spending for fiscal year 2011-12 to a record $38.4 billion (Dh140.92 billion), up by a notable 25 per cent. As for Saudi Arabia, King Abdullah recently issued two decrees setting aside a total of $130 billion aimed at providing housing for thousands of ostensibly low-income families by Saudi standards besides creating thousands of jobs mainly in the security apparatus as well as augmenting allowances and subsidies for the nationals.
Two-year outlay
To be sure, GCC countries tend to prepare governmental budgets using relatively low oil prices, reflecting an age-old conservative approach. Again using Qatar as an example, the authorities assumed $55 per barrel for fiscal year 2011-12 starting in April, not withstanding actual prices in the international market, which hover around $107 per barrel. Yet Kuwait, which shares with Qatar the start and end of fiscal year, used an average rate of $60 per barrel.
Bahrain stands out in assuming an average rate of $80 per barrel for each of fiscal year 2011 and 2012, ostensibly for limiting projected deficits via stronger income amid growing spending.
Bahrain is unique within regional economies for preparing budgets for two fiscal years concurrently.
In fact, oil production is on the rise not only in Saudi Arabia, the largest oil exporter in the world, but also small regional producers. For instance, Oman's oil output averaged around 710,000 barrels a day in 2007 only to increase to around 900,000 barrels a day in 2011.
Nevertheless, there is a negative side to the story of rising spending on the back of stronger oil prices and production levels, namely making GCC countries only more dependent on the petroleum sector. This runs against the stated goal of making the regional economies less dependent on the petroleum sector.
Mercy of markets
For instance, the petroleum sector including sale of gas is projected to account for 93 per cent of total revenues of Kuwait in 2011-12 fiscal year. Sadly, this means that the well-being of Kuwait's economy is at the mercy of developments in the oil market.
True, GCC countries are leaders when it comes to petroleum statistics in terms of production and proven reserves, but socio-political and socio-economic prices tend to reflect oil prices. The reasons for steady oil prices include uncertainty regarding oil output of Opec-member Libya and steady economic recovery in many parts of the world from the global financial crisis.
All told, GCC countries need to heed the IMF's call for using surpluses achieved on the back of steady oil revenues to diversify the local economies.
The GCC's external current account surplus is projected to increase from $136 billion in 2010 to $304 billion in 2011. Time is ripe for the GCC countries to undertake economic reforms, as the extra oil proceeds would provide a cushion for shortcomings caused by the restructuring process.
The writer is a Member of Parliament in Bahrain.
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